RBA Board shows confidence in economic recovery
Currency Market Update – 20 April 2011
Minutes of RBA Board meeting reflect confidence in economic recovery
The minutes of the RBA Board meeting on 5 April were released this week and noted that while interest rates are currently slightly above average levels, they remain appropriate given the outlook for the economy and its desire to keep inflation within a medium-term target range of two-to-three percent.
The minutes reinforced market sentiment that an interest rate hike was unlikely before the fourth quarter, if at all this year. With the market already pricing in one rate rise this year the release of the minutes had little immediate impact on the AUD.
The AUD continues to trade in unchartered territories against the USD reaching a high of 1.0585 so far this week. While there are no obvious forces holding the AUD back, there remains potential for natural profit taking to occur at these elevated trading levels as market participants pause to consider their next steps. A short-term correction of two-to-three cents is a possibility.
Recent news of Standard & Poor placing U.S. Government debt on a negative watch and the continued uncertainty with the Greek debt issue highlights the economic uncertainties at play in much of the rest of the world. Any deterioration in the debt situation in the U.S. or Europe could act as a catalyst to risk aversion and a move away from the AUD. The market is already showing signs that risk aversion is setting in with safe haven assets like gold topping US$1,500 for the first time and silver reaching a 31-year high this week.
Any tightening of US monetary policy with a rise in interest rates could also weigh down the AUD as the differential between Australian and US interest rate settings narrows. The timing of such an interest rate rise is uncertain.
Whilst the strong AUD has created problems for exporters, such as the manufacturing and tourism industries, importers too need to be vigilant. In such a fluid situation, importers need to be prepared for all contingencies including the real possibility of the AUD running out of momentum and retreating against the USD.